PITECO S.p.A.'s (BIT:PITE) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?
Most readers would already be aware that PITECO's (BIT:PITE) stock increased significantly by 18% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to PITECO's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for PITECO
How To Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for PITECO is:
10% = €3.3m ÷ €31m (Based on the trailing twelve months to June 2020).
The 'return' refers to a company's earnings over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.10 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
PITECO's Earnings Growth And 10% ROE
At first glance, PITECO seems to have a decent ROE. Yet, the fact that the company's ROE is lower than the industry average of 21% does temper our expectations. Additionally, the flat earnings seen by PITECO over the past five years doesn't paint a very bright picture. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. Therefore, the flat earnings growth could be the result of other factors. These include low earnings retention or poor capital allocation.
We then compared PITECO's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 21% in the same period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is PITECO fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is PITECO Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 66% (meaning, the company retains only 34% of profits) for PITECO suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.
Additionally, PITECO has paid dividends over a period of five years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 35% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 21%, over the same period.
Conclusion
Overall, we have mixed feelings about PITECO. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About BIT:PITE
PITECO
PITECO S.p.A. engages in the design, development, and implementation of software for treasury, finance, and financial planning management worldwide.
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